EconoMeter: How much should the wealthy be taxed?

Mitt Romney's 15% tax rate prompts look at how much is too much -- or too little.

Days before the Florida primary, Newt Gingrich and Mitt Romney debate tax rates appropriate for capital gains. Romney said he paid about 15 percent on his income last year, largely because most was from capital gains, and Gingrich, about 30 percent.
AP photo

Days before the Florida primary, Newt Gingrich and Mitt Romney debate tax rates appropriate for capital gains. Romney said he paid about 15 percent on his income last year, largely because most was from capital gains, and Gingrich, about 30 percent.

Q: Is raising the effective federal tax rate on the wealthy to 30 percent, regardless of income source, good economic policy

Panel's answer: Yes 2, No 6

Raising taxes when the economy is struggling is not a good idea. It may sound good; let someone pay that can most afford it. However, the history of this type of policy shows that there is a better than even chance that the economy will slow (less job growth, more unemployment) and the targeted “rich” will use the system to hide their income. This type of policy sends us in the wrong direction. Instead, imagine a tax system where the top rates on wages and capital are more equal, and virtually all deductions are eliminated. This policy provides a larger overall tax take from the rich and protects the dynamism of the economy.

Yes
48% (121)

No
52% (133)

Without reducing capital gains taxes at the same time, further increasing federal income tax rates would be disastrous to the economy. Current U.S. tax rates of 35 percent on corporate income are already among the highest in the world. Additionally taxing capital gains and dividend income actually increases the effective tax rate on investment income above 45 percent. Further raising federal income tax rates would push effective rates beyond 60 percent, without even considering state and local taxes or death taxes. Already a barrier to American growth and competitiveness, this would crush needed investment for struggling U.S. business activity.

To close the massive federal budget deficit, there need to be both cuts in expenditures and increases in revenue. Revenue to the federal government as a percentage of GDP is at its lowest level since 1950. Some argue that a lower tax rate is needed on capital gains to encourage investment and innovation, but there is no evidence that that is the case. Would a higher capital gains tax have stopped Wozniak and Jobs from starting Apple? Even less of an argument can be made for having a lower tax rate for carried interest and gains from the trading of stock.

Raising taxes always has some undesirable consequences, regardless of who pays them. In the case of capital income, that income has already been taxed once through the corporate profits tax, and part of what the IRS counts as “income” is in fact simply a compensation for inflation. Moreover, investment is a key determinant of long-run growth and for this reason is one of the last things we want to discourage. However, we’ve dug ourselves into such a deep hole with the accumulating federal debt that we’ll be forced to take a number of actions that we’d really rather not. Raising taxes on Americans with high levels of capital income is unfortunately one of the tools we’ll need to use to restore fiscal solvency.